Q&A: 10p tax rate cut

The 22% tax rate is coming down to 20%, and the 10% tax rate for lower earners is being abolished altogether - forcing more than five million workers up into the 20% tax bracket.

The changes announced in the 2008 budget do, however, also include the raising of tax allowances for the over-65s, as well as the income thresholds for the withdrawal of working tax credits and child tax credits.Who is affected by the abolition of the 10p tax rate?

There are several types of losers. First, there are childless, single people earning between £5,435 and £19,355 a year and ineligible for working tax credits because they are under 25.

Part-time workers who clock up fewer than 30 hours a week are also hit by the cut because they do not qualify for working tax credits either.

Then there are the early retirees, who do not receive tax credits, but who are too young to benefit from the increase in the tax allowance for those aged 65 and over.

The winners, most noticeably, are people earning between £19,355 and around £40,000. Others to benefit from the changes are those earning under the £19,355 threshold who have young children and are therefore eligible for higher personal allowances, or are over 65 and qualify for higher personal allowances.

How many people will be hurt by the changes?

Around 5.3 million households – roughly one in five - will be left worse off, mostly in the poorer half of the population. Two in five will gain and the remaining 40% will be unaffected.

How much does the Treasury expect to earn from the 10p abolition?

Alistair Darling has said that tax revenues will increase by £7bn through the changes. However, that has to be offset by the £1bn cost of raising tax allowances for the over-65s, and the £2.3bn cost of raising the child tax credit and working tax credit thresholds – all of which leaves the Treasury with a £3.7bn net gain.